2004 (9) TMI 36 - HC - Income Tax

Deduction under section 80-I - duty drawback - industrial undertaking - Whether the amount of duty drawback can be regarded as income derived from an industrial undertaking so as to entitle the assessee to a deduction under section 80-I of the Income-tax Act, 1961? - Merely because under the scheme to encourage exports the duty (D) is refunded subsequently by way of duty drawback , it cannot be regarded as the profit or gain derived from the industrial undertaking. It may constitute profits or gains of the business by virtue of section 28 of the Act, but, it cannot be construed as profits or gains derived from the industrial undertaking for, its immediate and proximate source is not the industrial undertaking but the scheme for duty drawback - In view of this, the appeal is required to be allowed. We answer the question in favour of the Revenue

Summary

Issues:
Whether duty drawback can be considered as income derived from an industrial undertaking for the purpose of claiming a deduction under section 80-I of the Income-tax Act, 1961.

Analysis:
The High Court was tasked with determining whether duty drawback can be classified as "profits and gains derived from an industrial undertaking" under section 80-I of the Income-tax Act, 1961. The court referred to a previous case where a Division Bench of the Madras High Court had considered a similar issue under sections 80HH and 80J of the Act. In that case, it was held that while benefits like duty drawback are related to the business activities of the assessee, they cannot be considered as income "derived" from the business. The court emphasized the need for a direct nexus between profits and the industrial undertaking for income to be considered derived from it. The court also cited a Supreme Court case where it was held that import entitlements were not derived directly from the industrial undertaking but from a government scheme related to exports.

In the present case, the court applied the same reasoning to duty drawback. The court explained that duty drawback, being a refund of duties paid on inputs, does not directly stem from the industrial undertaking itself but rather from a government scheme aimed at encouraging exports. While duty drawback may increase the overall business profits, it does not alter the profits and gains derived specifically from the industrial undertaking. The court concluded that duty drawback cannot be construed as income derived from the industrial undertaking for the purpose of claiming a deduction under section 80-I of the Act. Therefore, the court allowed the appeal in favor of the Revenue, ruling that duty drawback does not qualify for the deduction under section 80-I.